Yahoo Shares Drop as Sales Forecasts Miss Some Estimates

Yahoo! Inc. (YHOO:US) shares dropped the most
since August after the largest U.S. Web portal gave first-
quarter and full-year sales forecasts that fell short of some
analysts’ projections.

Revenue in the current period, excluding the portion passed
on to partners, will be $1.07 billion to $1.10 billion, Yahoo
said yesterday in a statement. That was shy of the $1.12 billion
average predicted (YHOO:US) by analysts. Sales on that basis in 2013 will
be $4.5 billion to $4.6 billion, compared with analysts’ average
$4.59 billion estimate.

The disappointing forecasts underscore the challenge Chief
Executive Officer Marissa Mayer faces in display advertising, an
area where Yahoo lags behind Google Inc. (GOOG:US) and Facebook Inc. (FB:US) They
may also indicate that management is seeking to give itself some
breathing room while working to make the recovery take hold,
said Brian Wieser, an analyst at Pivotal Research Group LLC.

“Management provided conservative expectations for the
period ahead, leaving the primary guessing game for the next
quarter about the degree to which expectations have been set low
or that the company is focused on internal investments, or
both.” said Wieser, who rates Yahoo shares hold.

Fourth-quarter profit, excluding some items, was 32 cents a
share. Sales, excluding revenue passed to partner sites, rose 4
percent to $1.22 billion. Analysts on average had projected (YHOO:US)
profit of 28 cents on revenue of $1.21 billion, according to
data compiled by Bloomberg.

Yahoo shares (YHOO:US) fell 3 percent to $19.70 at the close in New
York, for the biggest decline since Aug. 10. The stock has
gained 25 percent over the past 12 months.

Mayer’s Strategy

Yesterday’s conference call with analysts was the most
substantial discussion of Mayer’s strategy since she was hired
in July, and may help convince investors that renewed focus on
product innovation will eventually drive Yahoo’s sales growth,
said Sameet Sinha, a San Francisco-based analyst at B Riley &
Co., who rates Yahoo shares a buy.

“Our fourth quarter benefited from user interface
improvements on mobile, very strong sales execution as well as
favorable macroeconomic and seasonal trends,” Mayer said
yesterday on the call.

Revamping Sites

Sales of display ads fell 3 percent to $591 million. The
company is working to improve in display, a market that
EMarketer Inc. predicts will increase to $17.7 billion this
year, by investing more in tools that deliver ad promotions to
consumers based on their browsing history, said Kevin Stadtler,
president of Stadtler Capital Management LLC.

“They are really well-positioned because they can provide
real-time data to advertisers, who can then pinpoint ads to
people who are interested in their products,” Stadtler, who
manages $7.2 million in assets, including Yahoo shares, said in
an interview. “That’s a really big deal.”

Mayer’s turnaround will emphasize improvements to 12 top
Yahoo sites designed to get users interacting more, and for
longer periods of time, she said on the call. In the same way
that recent updates to Flickr got users uploading 25 percent
more photos, and an overhaul of Yahoo Mail resulted in a higher
portion of ads being clicked, the company hopes to refresh sites
such as Yahoo Finance and Yahoo News, Mayer said.

‘Social Context’

To help its push for product improvements, Yahoo hired 120
new employees with computer science degrees in the fourth
quarter, Mayer said. She also brought on Sandy Gould, a former
recruiting executive at Walt Disney Co., to lead talent
acquisition and development.

Yahoo is working on technology that will personalize
content from the Web and feed it to people on their mobile
devices, Mayer said in an interview with Bloomberg News last
week. The company had more than 200 million unique mobile users
in 2012, she said on the conference call.

User data will make it possible to create a so-called
interest graph to show connections among people and create a
personalized Internet experience, she said.

“With the Web becoming so vast, there’s so much content
and there’s so much social context, and now with mobile, there’s
so much location context and activity context,” Mayer said.
“How do you pull all that together?”

Since Mayer arrived, Yahoo has continued to cede share in
its core business of display advertising. Yahoo’s portion of the
U.S. market was 9.3 percent last year, down from 11 percent in
2011, according to researcher EMarketer Inc. Google’s stake rose
about 2 percentage points to 15 percent, while Facebook
commanded 14 percent.

App Void

Google will retain its lead in the U.S. display-ad market
this year with an 18 percent share, while Facebook will have 15
percent and Yahoo will slip to 8 percent, EMarketer estimates.

Yahoo’s fortunes are waning in tandem with the personal-
computer industry. Yahoo, once the dominant choice for e-mail
and search tools when consumers surfed the Web on desktop PCs,
has failed to adapt to a new era where many users rely more on
smartphones and tablets.

Google and Facebook have been more nimble at catering to
consumers’ appetite for mobile apps that work seamlessly with
Web-based services, said Colin Gillis, an analyst at BGC
Partners LP in New York.

“If I’m using Yahoo Finance for my stock quotes, don’t
make me go find a new app to fill that void on my phone,”
Gillis said. “Because once you do that, you’ve lost a user.”

To contact the reporter on this story:
Douglas MacMillan in San Francisco at
dmacmillan3@bloomberg.net

To contact the editor responsible for this story:
Tom Giles at
tgiles5@bloomberg.net